Dollar strengthens on US economic outlook; euro dips below $1.20

LONDON: The dollar strengthened to two-month highs and the euro dropped below $1.20, as data pointed to an improvement in the US economic outlook, bond yields rose and oil prices hit a one-year high.

US Treasury yields ticked up after ADP payroll data showed an increase in employment on Wednesday and ISM data showed services industry activity in the United States rose to its highest in nearly two years in January.

Bullish comments from US Federal Reserve policymakers and renewed hopes for US fiscal stimulus are also lending new impetus to reflation trades.

The Democratic-controlled US House of Representatives approved a budget outline on Wednesday that would allow them to pass President Joe Biden's proposed $1.9 trillion coronavirus aid plan without Republican support.

The US dollar rose to as high as 91.485 against a basket of currencies, its strongest in two months.

Dollar shorts are elevated, meaning that the dollar has room to rise when speculators quit those positions.

"We are not convinced that the US dollar's current rebound will prove sustainable beyond the near-term," Lee Hardman, a currency analyst at MUFG, wrote in a note to clients, citing the continued decline of US real yields.

"In the near-term, though, there is still a risk that the US rebound can extend further following to heavy sell off at the end of last year," he said.

"The relentless move higher in global equity markets has lost some upward momentum at the start of this year, which is creating a more supportive backdrop for the US dollar in the near-term. The slow initial roll out of vaccines in Europe is also creating some concern that it risks undermining the outlook for global recovery in 2021 and boosting the relative appeal of the US dollar," he added.

Versus the yen, the dollar hit its highest in nearly three months, with the pair changing hands at 105.285 at 1127 GMT .

The euro fell below $1.20 for the first time since Dec. 1, and was down 0.3% on the day at $1.1994.

"The thing to monitor is how quickly Europe can get out the vaccine. If we see continued slowness there, you will see the gap widen between euro and dollar," said Justin Onuekwusi, portfolio manager at Legal & General.

In the UK, the Bank of England's meeting is in focus. Although no changes to monetary policy are expected, investors will be listening for comments on the economic recovery and the outcome of the bank's consultation on negative rates.

Businesses in Britain have been hobbled by a third national lockdown and are also grappling with post-Brexit barriers to trade with the European Union after Britain left the bloc's single market on Dec. 31.

The pound was slightly lower against the euro and down 0.5% against the dollar at $1.3576 -- a 17-day low.

"For today, Sterling could benefit if the BoE maintains its critical stance on negative rates. However, with a view to Brexit we continue to see downside risks for Sterling," wrote Commerzbank strategist You-Na Park-Heger in a note.

Elsewhere, the Australian dollar was little changed at 0.76215 versus the US dollar. The Norwegian crown was down around 0.4%.

Bitcoin continued to climb, touching a 20-day high in early trading. Ethereum reached record highs above $1,600.